Audit of block grant program: Worcester must repay US $2M+

A long awaited federal audit of the city's block grant program has found that the city improperly administered affordable housing funds and as a result must pay the federal government back more than $2 million.

While the three former city housing officials who oversaw the community development block grant program during the audited years have either been forced out or fired, the report describes a department in disarray, with faulty and non-existent controls, poor record-keeping and little oversight.

"The city did not administer its CDBG program in accordance with applicable HUD requirements and its own contract requirements," the report states. "City officials did not ensure that costs paid for under the city's housing, public service and code enforcement activities were properly classified, eligible and supported."

City officials say they will likely either seek to recoup the money from the four nonprofit community development corporations and community lending agency that were the primary recipients of the funding from 2010-2012, or take it out of future allocations.

The amounts the auditors said were ineligible, as of now, are:

• Worcester East Side CDC - $407,407

• Worcester Common Ground CDC - $367,265

• Oak Hill CDC - $255,372

• Main South CDC - $294,539

• Worcester Community Housing Resources - $575,356

• City's Operation Clean City program - $130,512

• City code inspection (constable services) - $80,560.

The 36-page report by the Office of the Inspector General of the U.S. Department of Housing and Urban Development was released Monday.

The report also identified more than $5 million in additional HUD money spent on what the auditors called "questionable," or "unsupported" items.

Of the $5 million in questionable funds, $2.8 million was spent by the CDCs, and $2.6 million on city services.

Timothy J. McGourthy, the city's chief development officer, said the city lacked documentation on many expenses that he believes will be determined to be eligible, and that the city relied on CDCs and other groups to document the funded activities. He said the city is now working with the groups to come up with backup information to justify the expenses.

"We should have had a higher level of activity when we administered all these grants," Mr. McGourthy said. "We rely on the groups to provide these records."

Mr. McGourthy also noted that the HUD report acknowledged the city's move to shore up the housing department this year with more staffing and improved processes. He said the audit's critical tone reflected its focus on three years when the program was troubled, not the period when problems had been corrected.

Stephen Teasdale, executive director of the Main South CDC, said he is confident his group will be able to substantiate its unsupported expenses, and also said he believes the amount the CDC will have to pay back will eventually be lower.

Meanwhile, without having yet read the whole report, Mr. Teasdale said: "We've been saying all along that the original findings were critical of the city administration."

CDC and city officials said Wednesday that they expected to work with the Boston HUD office to lower the amount owed, principally by increasing the amount of property acquisition costs allowed to count against federal funding.

The CDCs spent the money on operating expenses such as administration and overhead that were ineligible for federal funding, and, in some cases, billed "unreasonable" amounts for activities, the report said..

For example, in the case of housing loans made by Worcester Community Housing Resources housing loans, the nonprofit lending agency "in several instances the administrative fees charged to the CDBG program to process the loans equaled or greatly exceeded the amount of the loan," according to the report.

The agency processed one loan for $579 and charged the grant program $6,652 in administrative fees, the auditors said.

WCHR also did not turn over interest proceeds from its revolving loan as required, though it made some interest payments in 2012, the report said.

Dominick Marcigliano, executive director of the agency, did not return a call seeking comment.

Meanwhile, the report said the city also improperly spent at least $200,000 of block grant money on cleanup and constable services to deliver code inspection notices, and that the city also exceeded the 15 percent cap on using block grants for other public services.

Those cleanup and code expenses should have been paid for out of the city's regular operating budget, the HUD report said.

Mr. McGourthy, the city development officer, acknowledged that the administration's neighborhood cleanup initiative, which has used block grant funding for about a decade, should probably now be absorbed as a standard in-house program.

Mr. McGourthy also said the $80,000 expense for constables is not ineligible per se, but rather is a service for which the city did not contract with HUD and so is not allowable.

City Manager Michael V. O'Brien sought to minimize any damage from the report in a memo to city councilors Wednesday.

"The audit team highlights past issues within our Federal grant management programs. It is not a review of current practice. Over the past two years, we have undertaken significant steps to ensure that we are only contracting for eligible and fundable programs," Mr. O'Brien wrote. "We will use these findings, together with our own ongoing analysis, review, and restructuring efforts, to continue to build a strong program that supports Worcester's neediest individuals well into the future."

Dennis Hennessy, the city's former director of housing and neighborhood development, retired late last year.

Former housing director Jacqueline Vachon-Jackson was fired in March 2012 after buying a condominium from a seller associated with a private developer doing business with the city.

The housing director before her, Scott Hayman, was suspended by Mr. O'Brien and then quit amid questions about the awarding of federal housing funds.